Climate Actions, Market Beliefs, and Monetary Policy

Barbara Annicciarico (), Fabio Di Dio () and Francesca Dilusio ()
Additional contact information
Barbara Annicciarico: Universita degli Studi di Roma Tor Vergata, http://www.uniroma2.it/
Francesca Dilusio: Bank of England
Authors registered in the RePEc Author Service: Barbara Annicchiarico ()

No 2022-14, JRC Working Papers in Economics and Finance from Joint Research Centre, European Commission

Abstract: This paper studies the role of expectations and monetary policy on the economy's response to climate actions. We show that in a stochastic environment and without the standard assumption of perfect rationality of agents, there is more uncertainty regarding the path and the economic impact of a climate policy, with a potential threat to the ability of central banks to maintain price stability. Market beliefs and behavioural agents increase the trade-offs inherent to the chosen mitigation tool, with a carbon tax entailing more emissions uncertainty than in a rational expectations model and a cap-and-trade scheme implying a more pronounced pressure on allowances prices and inflation. The impact on price stability is worsened by delays in the implementation of stringent climate policies, by the lack of confidence in the ability of central banks to keep inflation under control, and by the adoption of monetary rules tied to expectations rather than current macroeconomic conditions. Central banks can implement successful stabilization policies that reduce the uncertainty surrounding the impact of climate actions and support the greening process while staying within their mandate.

Keywords: Monetary policy; climate policy; expectations; inflation; market sentiments; business cycle (search for similar items in EconPapers)
JEL-codes: D58 E32 E71 Q50 (search for similar items in EconPapers)
Pages: 50 pages
Date: 2022-09
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ene, nep-env and nep-mon
References: Add references at CitEc
Citations: View citations in EconPapers (6)

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Related works:
Journal Article: Climate actions, market beliefs, and monetary policy (2024)
Working Paper: Climate Actions, Market Beliefs and Monetary Policy (2022)
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Persistent link: https://EconPapers.repec.org/RePEc:jrs:wpaper:202214

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